Canadian Dollar Declines Amid Oil Price Drop and Trade Agreement Concerns

What's Happening?

The Canadian dollar has weakened to a four-month low against the U.S. dollar, driven by a significant drop in oil prices and apprehensions surrounding the renewal of the U.S.-Mexico-Canada trade agreement (USMCA). On October 2, 2025, the Canadian dollar was trading 0.2% lower at 1.3960 per U.S. dollar, marking its weakest level since May 16. The decline in the Canadian dollar coincides with a 2.1% fall in oil prices, which settled at $60.48 per barrel. This drop is attributed to concerns about oversupply in the market ahead of an OPEC+ meeting. Additionally, the U.S. dollar strengthened against other major currencies as traders considered the potential impact of a U.S. government shutdown. The USMCA, which has protected Canadian exports from U.S. tariffs, is due for review in 2026, and recent public consultations have begun in the U.S., Canada, and Mexico.

Why It's Important?

The decline in the Canadian dollar and oil prices has significant implications for the Canadian economy, which heavily relies on oil exports. A weaker Canadian dollar can increase the cost of imports, affecting consumer prices and potentially leading to inflationary pressures. The uncertainty surrounding the USMCA negotiations adds another layer of complexity, as the trade agreement is crucial for maintaining tariff-free access to the U.S. market, a key destination for Canadian goods. The potential for a U.S. government shutdown further complicates the economic landscape, as it could disrupt trade and economic activities. The Bank of Canada's consideration of changes to its inflation metrics highlights the need for adaptive economic policies in response to external shocks.

What's Next?

The upcoming OPEC+ meeting will be closely watched for decisions that could influence oil prices and, consequently, the Canadian dollar. Additionally, the progress of USMCA negotiations will be critical in determining the future trade dynamics between the U.S., Canada, and Mexico. The Bank of Canada's potential adjustments to its inflation measurement approach may also impact monetary policy decisions. Stakeholders, including businesses and policymakers, will need to navigate these uncertainties to mitigate potential economic disruptions.